Barnes and Noble 2010 Annual Report Download - page 27

is recorded for that portion of the asset’s carrying value in
excess of fair value. Impairment losses included in selling
and administrative expenses totaled $12.1 million, $0.02
million, $11.7 million and $5.9 million during fiscal 2010,
the transition period, fiscal 2008 and 2007 and are related
to individual store locations. The Company does not believe
there is a reasonable likelihood that there will be a material
change in the estimates or assumptions used to calculate
long-lived asset impairment losses. However, if actual
results are not consistent with estimates and assump-
tions used in estimating future cash flows and asset fair
values, the Company may be exposed to losses that could
be material. A 10% decrease in the Company’s estimated
discounted cash flows would not have had a material impact
on the Company’s results of operations in fiscal 2010.
Goodwill and Unamortizable Intangible Assets
At May 1, 2010, the Company had $528.5 million of
goodwill and $314.9 million of unamortizable intangible
assets (those with an indefinite useful life), accounting
for approximately 22.8% of the Company’s total assets.
ASC 350-30, Goodwill and Other Intangible Assets, requires
that goodwill and other unamortizable intangible assets
no longer be amortized, but instead be tested for impair-
ment at least annually or earlier if there are impairment
indicators. The Company completed its annual goodwill
impairment test in November 2009 and determined that no
impairment charge was necessary. The Company performs
a two-step process for impairment testing of goodwill as
required by ASC 350-30. The first step of this test, used to
identify potential impairment, compares the fair value of
a reporting unit with its carrying amount. The second step
(if necessary) measures the amount of the impairment. The
Company has noted no subsequent indicators of impair-
ment. The Company tests unamortizable intangible assets
by comparing the fair value and the carrying value of such
assets. The Company also completed its annual impairment
tests for its other unamortizable intangible assets by com-
paring the estimated fair value to the carrying value of such
assets and determined that no impairment was necessary.
Changes in market conditions, among other factors, could
have a material impact on these estimates. The Company
does not believe there is a reasonable likelihood that there
will be a material change in the estimates or assumptions
used to calculate goodwill and unamortizable intangible
asset impairment losses. However, if actual results are
not consistent with estimates and assumptions used in
estimating future cash flows and asset fair values, the
Company may be exposed to losses that could be material. A
10% decrease in the Company’s estimated discounted cash
flows would have no impact on the Company’s results of
operations.
Gift Cards
The Company sells gift cards which can be used in its stores
or on Barnes & Noble.com. The Company does not charge
administrative or dormancy fees on gift cards, and gift
cards have no expiration dates. Upon the purchase of a gift
card, a liability is established for its cash value. Revenue
associated with gift cards is deferred until redemption
of the gift card. Over time, some portion of the gift cards
issued is not redeemed. The Company estimates the por-
tion of the gift card liability for which the likelihood of
redemption is remote based upon the Company’s historical
redemption patterns. The Company records this amount
in income on a straight-line basis over a 12-month period
beginning in the 13th month after the month the gift card
was originally sold. If actual redemption patterns vary from
the Company’s estimates, actual gift card breakage may
differ from the amounts recorded. Through fiscal 2010, the
Company also sold online gift certificates for use solely on
Barnes & Noble.com, which were treated the same way as
gift cards. The Company recognized gift card breakage of
$21.3 million, $5.4 million, $5.2 million, $21.4 million,
and $19.7 million during fiscal 2010, the transition period,
the 13 weeks ended May 3, 2008, fiscal 2008 and fiscal
2007, respectively. The Company had gift card liabilities
of $291 million, $274 million and $321 million, as of May
1, 2010, May 2, 2009 and January 31, 2009, respectively,
which amounts are included in accrued liabilities. The
Company does not believe there is a reasonable likelihood
that there will be a material change in the estimates or
assumptions used to recognize revenue associated with gift
cards. However, if estimates regarding the Company’s his-
tory of gift card breakage are incorrect, it may be exposed
to losses or gains that could be material. A 10% change in
the Company’s gift card breakage rate at May 1, 2010 would
have affected net earnings by approximately $2.1 million in
fiscal 2010.
Income Taxes
Judgment is required in determining the provision for
income taxes and related accruals, deferred tax assets
and liabilities. In the ordinary course of business, tax
issues may arise where the ultimate outcome is uncertain.
Additionally, the Company’s tax returns are subject to
audit by various tax authorities. Consequently, changes in
the Company’s estimates for contingent tax liabilities may
materially impact the Company’s results of operations or
financial position. A 1% variance in the Company’s effec-
tive tax rate would not have had a material impact to the
Company’s results of operations in fiscal 2010.
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